Deficits as far as the eye can see

Joe Oliver: Early signs point to spiralling deficits that will damage job creation, undermine economic growth, jeopardize long-term prosperity and make it excruciatingly difficult to return to balance in four years

As Yogi Berra observed, it’s tough to make predictions, especially about the future. But one of the most time-honoured traditions we can count on is that a new government will invariably discover to its amazement that the cupboard is bare, finances are in tatters and its ability to fulfill its promises are compromised.

Surprise! It has happened again. More in sorrow than in anger, our new Minister of Finance Bill Morneau revealed to an eager media that the previous Conservative government’s projected surplus of $1.4 billion in fiscal 2015-16 will alas turn into a $3-billion deficit. What a mess we have left behind. But wait a moment. According to the latest Fiscal Monitor, there was a $1.6-billion surplus sitting in the kitty after six months to the end of September. So what happened to $4.6 billion? Well, apparently lower revenue and higher expenses in his Economic and Fiscal Projections mean last year’s balanced budget will be the last for a long time.

I have repeatedly said that what kept me up at night as Finance Minister were external risks — the collapsing price of oil, mediocre global economic growth and geopolitical crises. However, reduced government tax revenue only accounts for $600 million of the total. Most of the difference relates to increased expenses. Furthermore, I did not conjure up the projections with my political staff. Rather, I relied on the average of the projections of economic growth and oil prices of 15 private sector economists, which we discounted for subsequent developments. The Department of Finance then used those projections to arrive at the revenue numbers.

Bottom line, we left the new government with a surplus, not a deficit. What they do in the second half of the year is up to them. Furthermore, the Parliamentary Budget Officer forecast a surplus of $1.2 billion for the entire year, only slightly less than our projection.

We left the new government with a surplus, not a deficit

The Liberal Fiscal Update disclosed high-level data on expenditures and new spending programs were apparently not included. Still, there was little detail, leaving unanswered questions about what may or may not have been included. As to the platform commitments, there are legitimate concerns about inadequately costed programs, unrealistically inflated revenue from proposed tax hikes and the likelihood of new priorities. Finally, there is no contingency for risk, which is imprudent in a deficit scenario where there is no surplus to cushion against unforeseen costs.

A fair reading of the projections leads to an inevitable conclusion. Something is going to have to give. The Liberal government will have to renege on its promises – cancel programs, let deficits balloon and extend or more likely engage in some combination of both.

Our government introduced balanced budget legislation because we believe in the importance of avoiding deficits, outside exceptional circumstances like a recession or natural disaster. Balanced budgets allow for further tax decreases, permit more social spending, protect against external shocks, contain interest payments, preserve our top credit rating and avoid saddling our children with more debt. They also create a powerful political disincentive which disciplines government to keep its fiscal promises. Imagine the hyperbolic Opposition reaction if our government had missed our promised balanced budget this year, even by a few hundred million? In contrast, a deficit makes profligacy more likely. Look at today’s situation. The government already has the press calling $10 billion a small deficit. How upset will they be if it moves to $15 billion? This is precisely what the current government may be counting on, as it prepares to scrap our legislation entrenching balanced budgets.

It was instructive, if unsettling, that neither Morneau nor Scott Brison, President of the Treasury Board, would say whether they would commit to a balanced budget in the fourth year of their term. Remember that was a central plank of the Liberal platform – “modest” deficits for three years and a surplus in the fourth. Indeed, it was on the top of the list of Morneau’s publicly disclosed mandate letter. Which raises another interesting question.

Mandate letters were made publicly available for the first time as a sign of openness and transparency. But if within weeks a key mandate may be abandoned, we are entitled to ask whether they can be relied on and whether there is an understanding, tacit or explicit, verbal or written, about what ministers’ marching orders really are. Everyone understands that government has to operate with a degree of confidentiality. But this government’s overarching message of openness may be misleading Canadians about how much they are really being told. It is only fair to hold the Liberal government to its much ballyhooed promise.

Pocketbook issues affect everyone, so taxes and government spending will be top of mind for all Canadians. I wish the new government well in crafting its new budget. But testing times should not be an excuse to open up the coffers. To the contrary, even though austerity is not called for, external challenges should be responded to prudently. However, I worry that early signs point to spiralling deficits that will damage job creation, undermine economic growth, jeopardize long-term prosperity and make it excruciatingly difficult to return to balance in four years. That is not a future I want to predict.

Comments

Postmedia is pleased to bring you a new commenting experience. We are committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. We ask you to keep your comments relevant and respectful. Visit our community guidelines for more information.